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Why shoppers aren’t letting tariffs put a damper on their holiday cheer

Americans aren’t expected to let concerns over tariffs or fears of an economic slowdown dampen their holiday shopping this year. Instead, the low unemployment rate and recent wage gains have consumers ready to spend significantly more than last year.

The National Retail Federation predicts Americans will spend as much as $730.7 billion from Nov. 1 through Dec. 31, a 4 percent increase from 2018. The spending breaks down to $1,047.83 per person.

“We know that consumers are out and have already been shopping. That’s a good indicator,” said Jack Kleinhenz, chief economist for the National Retail Federation.

The high expectations are being boosted by strong consumer confidence. Earlier this month, the Consumer Sentiment Index produced by the University of Michigan marked a level of optimism not seen since the late 1990s.

Another index measuring consumer confidence, produced by the business research association Conference Board, decreased slightly in October, but still remained high enough for economists to predict that holiday spending will remain strong.

Even though consumers have expressed concern over the tariffs that the Trump administration has put on China, many retailers have tried to absorb those costs or spread them out across products so they aren’t as noticeable. Others ordered extra goods before the tariffs went into place to avoid the import tax altogether.

Plus, increased costs from the tariffs are being offset by other financial gains.

The national unemployment rate is 3.6 percent. Wages have increased, albeit somewhat slowly. Inflation is modest and mortgage rates are at near historic lows. The stock market has also risen, benefiting the 55 percent of Americans who own stock–much of it in retirement accounts.

“What more could consumers ask for?” said Richard Curtin, the director of the Surveys of Consumers at the University of Michigan.

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“Retail never dies. It just takes new forms,” said Robby Ohmes, a Bank of America retail analyst.

In fact, traditional discount stores, like Costco, Walmart and Target, stand to benefit the most from this year’s holiday shopping, according to a Bank of America analysis. (Costco, Walmart and Target have all done business with Bank of America in the last year.)

Traditional retailers can also leverage their digital footprints. Ohmes said by reaching online customers, stores can build brand awareness and bring in customers who might not have shopped there otherwise.

Many retailers have made a significant effort to improve their digital strategies as they try to woo younger generations. Both Target and Walmart, which reported strong earnings in the last quarter, have invested in one-day shipping in an effort to rival online retailers like Amazon.

Discount stores are also likely to appeal to lower-income Americans who have benefitted from minimum wage increases in 18 states this year, as well as wage growth across all income levels as the nation’s longest economic expansion continues.

The longer-term outlook

When asked about the future U.S. economy, consumers are less optimistic. But that’s unlikely to stop their holiday spending because they are better prepared to weather a financial downturn.

Household debt as a percent of income remains much lower than before the Great Recession. Americans on average are saving a little more than 8 percent of their income–a rate still below historic averages but higher than savings rates in the early to mid-2000s.

“Consumers are going to have a merry Christmas, but consumers have upped their savings because like firms they understand that this expansion can’t last forever,” Curtin said.

Consumers’ thoughts about the future still seem to be significantly more optimistic than businesses, which have cut back spending on equipment and other investments, in part on fears about a slowdown in manufacturing.

Strong holiday sales won’t alleviate all of those fears, but could give the economy an extra boost leading into 2020, economists say. After all, about 20 percent of annual retail sales occur during the holidays, and consumer spending makes up nearly 70 percent of the U.S. GDP.